Updated on June 18th, 2021 by Bob Ciura
San Juan Basin Royalty Trust (SJT) has a high dividend yield of more than 13%, based on its annualized distributions over the first 6 months. It is one of more than 100 stocks with a 5%+ dividend yield. You can see the full list of established 5%+ yielding stocks by clicking here.
San Juan Basin has a very enticing payout, considering the S&P 500 Index has a ~1.4% dividend yield right now. That means San Juan Basin offers nearly 10 times as much dividend income as the average stock in the S&P 500.
San Juan Basin also pays its dividend each month, rather than each quarter like most other stocks. This gives investors the benefit of more frequent dividend payouts.
San Juan Basin is one of only ~53 monthly dividend stocks we currently track. You can download our full list of monthly dividend stocks (along with important financial metrics like dividend yields and payout ratios) by clicking on the link below:
However, San Juan Basin’s dividend may not be as attractive as it seems. The payout has been slashed repeatedly in recent years, and royalty trusts are a highly risky type of security.
This article will discuss why investors should view royalty trusts like San Juan Basin with a fair dose of skepticism.
San Juan Basin is a royalty trust, established in November 1980. The trust is entitled to a 75% royalty interest in various oil and gas properties across over 150,000 gross acres, in the San Juan Basin of northwestern New Mexico.
On July 31st, 2017 Hilcorp San Juan LP completed its purchase of San Juan Basin assets from Burlington Resources Oil & Gas Company LP, a subsidiary of ConocoPhillips (COP).
More than 90% of the trust’s production is comprised of gas, with the remainder consisting of oil. The trust does not have a specified termination date. It will terminate if royalty income falls below $1,000,000 per year over any consecutive two-year period.
The past few years have been very difficult for San Juan Basin. Not surprisingly, this was due to lower oil and gas prices. Things became even more challenging last year as the coronavirus pandemic resulted in a steep decline in demand for oil and gas.
Last year, the price of natural gas for San Juan Basin decreased from an average price of $1.79 in 2019, to $1.51 in 2020. The price for oil decreased from an average price of $45.11 per barrel in 2019 to $31.47 per barrel in 2020.
The trust’s financial situation has deteriorated as a result. You can see a breakdown of San Juan Basin’s 2020 financial performance in the image below:
Source: 2020 Annual Report
Due to weak commodity prices, distributable income per unit declined 8% in 2020. It became so bleak for San Juan Basin that the trust failed to distribute a monthly dividend from June through September of 2020. Monthly dividends have resumed so far in 2021.
There are two significant growth catalysts for San Juan Basin moving forward. The first is higher commodity prices, which would help San Juan Basin generate higher cash flows. Specifically, higher gas prices would be a huge boost for San Juan Basin, since gas accounts for the vast majority of production.
The other major growth catalyst for San Juan Basin would be if the trust’s oil and gas properties produced for longer than is currently expected. San Juan Basin is not exactly sure of the lifespan of the trust. It has hired independent petroleum engineers, who conservatively estimated that the trust is likely to continue to produce for at least another 10-15 years.
These two factors will determine whether San Juan Basin is a good investment. The trust is not permitted to engage in any business activity, which includes using any portion of the trust estate to acquire additional properties.
San Juan Basin ended 2020 with proved reserves of 147 million barrels of oil, and just over 38 billion cubic feet of natural gas.
If the trust lasts 10-15 years, at the 2020 distribution rate of $0.1737 per unit, investors would receive approximately $1.59-$2.39 per unit in distributions. Again, it is worth noting that San Juan Basin did not distribute dividends for several months last year. Had the trust been able to do so then expected lifetime dividends would be higher.
Failing to pay a monthly dividend has happened on occasion. This is a reminder that dividends are not a guarantee from the trust. Royalty trusts like San Juan Basin are essentially bets on commodity prices, which will be the major determining factor as to whether the dividend is sustainable.
Fortunately, the company has seen a recovery over the course of 2021. For the first quarter, distributable income increased to $0.166304 per unit from $0.099085 per unit in the same quarter last year, a 68% year-over-year increase. Growth in distributable income was primarily due to higher natural gas prices and lower lease operating expenses, partially offset by lower production.
As a trust, San Juan Basin’s dividends are classified as royalty income. Distributions are considered ordinary income, and are taxed at the individual’s marginal tax rate. Since oil prices are so important to royalty trusts’ cash flow, it is no surprise that San Juan Basin’s dividends have declined when the price per barrel has declined, such as from 2014 to 2016 and again in 2020.
San Juan Basin made the following distributions since the previous oil and gas industry downturn:
- 2014 distributions-per-share of $1.2846
- 2015 distributions-per-share of $0.3647
- 2016 distributions-per-share of $0.2989
- 2017 distributions-per-share of $0.8395
- 2018 distributions-per-share of $0.3859
- 2019 distributions-per-share of $0.1737
- 2020 distributions-per-share of $0.159164
Despite an uptick in distributions in 2017, declining commodity prices have caused San Juan Basin’s fundamentals to steadily deteriorate since 2014. This, in turn, led to lower dividend payments.
So far in 2021, San Juan Basin has paid unit holders $0.32 in dividends through June. At this rate, San Juan Basin would pay out approximately $0.64 per unit for the full year. This payout level would represent a yield of 13.2% based on the current unit price of $4.86.
As a result, if oil and gas prices can maintain current levels or continue to recover, San Juan Basin’s dividends could increase to a level that makes the stock attractive. For example, if the trust lasts another 10 years, investors will want a dividend yield well in excess of 10% annually, to make San Juan Basin a successful investment.
Of course, there is no guarantee of a longer life span, nor is there a guarantee that oil and gas prices will increase. As a result, royalty trusts are a particularly risky way to invest in the energy sector.
Investing in San Juan Basin right now is essentially making a bet on two things—higher oil and gas prices, and a longer-than-expected lifespan of the trust.
Royalty trusts can be a good source of dividend income because of their high yields. But investors need to make sure the trust’s assets will not run out before the initial investment is paid back. It appears that San Juan Basin investors will need a significantly higher price of natural gas and oil in order to make the stock a good investment.
If energy prices remain at depressed levels, San Juan Basin’s distributions would likely continue to decline. As such, investors looking for less risk from a dividend stock are encouraged to avoid royalty trusts like San Juan Basin.